Turkey Country Report Feb17 - February, 2017

March 6, 2017

Turkey remains in a difficult place both politically and economically that is weighing on growth. Analysts expect Turkey to be dogged by this uncertainty for at least two years depressing the economic outlook until at least 2019.

The World Bank earlier this month cut its 2017 GDP growth forecast for Turkey to 2.7%, while the IMF is projecting below potential expansion in 2017. The Fund expects Turkey’s economy to expand at 2.9% this year and 3.3% in 2018.

Last month, Fitch Ratings downgraded Turkey’s sovereign debt to junk - snuffing out the country’s last investment grade status from a major rating agency - and Standard & Poor’s lowered its outlook for the country.

End-2017 inflation expectations have risen in January, driven by the rising consumer price index and the depreciating Turkish lira, according to a recent central bank survey. Annual consumer price inflation soared to 9.2% while the lira has lost more than 8% of its value against the USD since the start of this year. Unemployment has also started to climb, hitting a seven-year high of 12% in November.

The economy is still reeling from the virtual collapse of its tourism business following the sanctions imposed by Russia and exacerbated by the war next door in Syria and the associated flood of refugees.

In the face of these challenges, the government has taken a number of measures and mobilised resources to put the economy back on its feet: It has cut taxes on white goods and certain housing projects to stimulate domestic demand and set up a controversial sovereign wealth fund to finance mega infrastructure projects. The effects of these actions on the economy remain to be seen.

Besides the currency’s woes and the slowing economy, investors have one other major issue to worry about: politics.

Turkey is facing geopolitical risks and security challenges from Islamic State and Kurdish militants. And it is going to hold a crucial referendum on creating an executive presidency in April that is creating substantial political uncertainty. However, all of this has apparently not deterred foreign investors from investing in Turkish assets.

Meanwhile, Erdogan has continued to purge the entire state economy of suspected “Gulenists” and recently sacked another 4,000 over civil servants. The purge has affected hundreds of thousands of people and as a state of emergency remains in place Erdogan has almost complete control of the country.

However, under the headline figures and political brouhaha the core Turkish economy continues to chug on. The PMI production index rose and wages remain stable, although retail sales remain low.

Other than that the banking sector is one sector that is doing well, with most of the leading banks reporting very strong profit growth in 2016 - a trick they are not expected to be able to repeat in 2017.

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